The standard deviation of a portfolio will tend to increase when:
A) a risky asset in the portfolio is replaced with Treasury bills.
B) short-term bonds are replaced with Treasury Bills.
C) the portfolio concentration in a single cyclical industry increases.
D) the weights of the various diverse securities become more evenly distributed.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio, a measure of its risk, tends to increase when the portfolio's investments become more concentrated in a single cyclical industry. This is because cyclical industries are more susceptible to economic fluctuations, making the portfolio's returns more volatile. Options A and B involve replacing riskier assets with Treasury Bills, which are considered risk-free, thus reducing the portfolio's standard deviation. Option D suggests diversification, which generally decreases risk.

The Standard Deviation of a Portfolio Will Tend to Increase